November 12, 2009


1) S&P 500 +0.2% after the EU close - closing +0.5% at 1098. Volumes light, NASDAQ and NYSE both 20% below 10-day averages. Financials (+1.4%) and Materials (+0.9%) outperforming. Retail (-0.3%) and Utilities (-0.2%) underperforming. After the close, Hewlett-Packard announced a $3 bn cash bid for 3Com, a 39% premium to the closing price.

2) Lower rates + weaker dollar + tighter credit = tailwinds for stocks. Tony Pasquariello: the attached chart (first attachment) is our GS Financial Conditions index back 20 years (ex-SPX). this puts into context how extremely accommodative the asset markets are for growth and - by extension - corporate profits. while it's easy to argue that poor fundamentals demand such an extreme policy response -- and that there will be a price to pay in the future for it -- over the short term this chart is a reminder to be careful when shorting S&P's on the back of weak macro data (e.g. payrolls).

3) Massive M&A buying power in the US tech sector. The 15 largest tech companies in the US had $270 bn of cash on their balance sheets at the end of 3Q.

4) Inability to capture the unusually poor performance by small firms might have overstated US 3Q GDP by 0.5 to 2 ppt. Jan Hatzius: We have attempted to gauge whether the recent official estimates might have overstated the economy’s true growth because of an inability to capture the unusually poor performance of small firms. Our tentative conclusion is that the economy might have grown between ½ and 2 percentage points more slowly than indicated by the Q3 “advance” estimate of 3.5% (annualized).

5) China set to see the largest decline in the savings rate - likely to decline by -5ppt by 2015 & -12ppt by 2015-2020 - significant implications for global spending patterns. Swarnali Ahmed: The underlying pressure to dissave is strongest in China, where we expect the savings rate to decline by 5ppt of GDP before 2015 and by another 12ppt in 2015-2020. This would have positive implications for consumption in China, and significant implications for global spending patterns, given that on our baseline projections China can overtake the US to become the largest economy in the world by 2027.

6) Chinese income tax receipts, appliance sales & auto sales growing strongly. Income tax receipts grew 18% yoy in September, the largest increase YTD. Appliances sales grew by 35% yoy in October, while auto sales were still strong at 44% yoy.

7) Sharp declines in Chinese copper & iron ore imports in October. (i) Chinese imports of unwrought copper and semi-finished products fell -34% mom in October. After stripping out our estimate for products, anodes and alloy, we estimate that imports of refined copper fell almost -50% mom to 150,000 tonnes in October, the smallest monthly total since November 2008. Chinese imports of copper scrap also fell sharply in October, down -37% mom to the lowest monthly import rate since February. (ii) Chinese imports of iron ore fell -30% in October, from September’s record level.

8) October saw the largest monthly outflow out of US equity funds since October. TrimTabs: We estimate that U.S. equity mutual funds lost $15.5 billion in October, their largest outflow since March 2009.

9) Leverage ETF investors were bearish in October. TrimTabs: Leveraged long ETFs lost $534 million (1.7% of assets) in the past month, while leveraged short ETFs took in $1.1 billion (8.9% of assets).

10) Inflows into bond funds are slowing - inflows into equity funds are accelerating - trend shift? TrimTabs: (i) Bond funds have received an estimated $7.9 billion (0.4% of assets) in November. This month’s inflow could be the first in five months below $30 billion. (ii) We estimate that mutual fund investors pumped $7.7 billion (0.2% of assets) into U.S. equity funds on the three trading days ended Tuesday, November 10, putting this week’s inflow on track to be the highest this year.

11) NYSE short interest decreased 3.3% or $10 bn in the second half of October. TrimTabs: The New York Stock Exchange reported Tuesday that short interest at its member firms fell to 13.0 billion shares in late October, down 3.3% from 13.5 billion shares in early October. The decline in late October more than reversed the increase in early October and brought short interest to its lowest level this year. If the average stock price is $20 per share and short interest dropped about 500 million shares in late October, then declining short interest added about $10 billion in buying power to the market in just a couple of weeks.

12) Continued strength in corporate buying. TrimTabs: Hewlett-Packard announced late Wednesday that it is buying 3Com for $3 billion in cash, the only new cash takeover announced this week. In addition, eight new stock buybacks totaling $2.9 billion have been unveiled this week, including three buybacks totaling $500 million announced Wednesday.

13) Hedge funds took in $40 billion in the past three months compared to outflows of $408 billion between September 2008 and July 2009. TrimTabs: Based on very preliminary data (406 hedge funds), we estimate that hedge funds took in $12.4 billion (0.9% of assets) in October, following a revised inflow of $10.2 billion (0.8% of assets) in September.

14) Continued redemptions from funds of hedge funds explains why flows into hedge funds are so low. TrimTabs: Funds of hedge funds lost an estimated $3.6 billion (0.6% of assets) in October.

15) Correlation between FX and risky assets still close to record highs. See second attachment, p. 1, bottom-right chart.

16) Implied volatility likely to decline. Stuart Kaiser: The average 3-month implied volatility of S&P 500 stocks is on par with average realized volatility over the past month indicating that the market expects the elevated volatility typically reserved for earnings season to persist into early next year. This was also the landscape following 2Q09 earnings and realized volatility did not match implied volatility levels in the 3 months leading up to 3Q09 earnings season.

17) Research focus today...
Reed Elsevier.....................................Trading statement broadly in line, CEO change could be a positive SBM Offshore.....................................Capital raising and trading update; more upside elsewhere - Sell Imperial Tobacco.................................Buy: GARP at its best; reiterate Buy

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